The European Central Bank is likely to wait until late this year or early 2005 before raising interest rates, but if the euro continues its ascent against the dollar, a cut could be on the cards.
A poll of 69 economists survey saw the ECB leaving its key rate on hold at a historic low of 2 per cent at its February 5th meeting. Two expected a cut.
Economists said the ECB could be impelled to cut rates if the euro resumed its rally against the dollar to reach levels around $1.35. However, most thought this was unlikely to happen in the next six months.
"I believe they will not cut again unless the euro rises firmly over $1.35 (and this level is) sustained despite ECB rhetoric," said Ms Sarah Hewin at American Express Bank in London, who forecasts a 25 basis point rise in September.
Euro zone policymakers have talked the euro down from a high of nearly $1.29 hit on January 12th and it was trading around $1.26 today.
The euro's strength has fuelled concerns that European goods could become too expensive for foreign buyers and economic recovery in the 12-nation bloc could be stifled.
Economists said the ECB would probably try intervening in the market first, leaving a rate cut as a last resort. Some said there was no key euro/dollar level that would prompt a cut.
So far data shows that European firms seem to be coping with the strong euro because booming global demand is tempering reluctance to pay for more expensive euro zone exports.